The project will investigate the nature and magnitude of the effects that HMOs have on hospital use and costs in their market areas. Its objective is to evaluate the validity of the cost containment strategy which argues that by introducing HMOs and expanding their market shares, the resulting increased competition will have the beneficial effect of reduced hospital utilization and cost overall in the fee-for-service market. Several previous studies have tried to do this. All of them resulted in ambiguous or confused findings due to the studies' methodological shortcomings. Several were small case studies without generalizability. None of them were able to disentangle the effects of HMO penetration on hospital costs from the potential effects of hospital costs on attracting HMOs to enter. This study overcomes those problems. It is posited that relatively higher levels of hospital costs in a market area act as an attractant to HMOs since their future ability to compete with traditional insurance carriers is increased where there is a potential for lower cost alternatives. This effect has to be separated from the subsequent impact of HMO market shares on hospital utilization and cost. This will be done by a multi-equation model in which the probability of HMO entry is seen to be separate from its subsequent effects on hospital costs. HMO entry will be estimated by variants of a two-stage probability regression estimating procedure. Data from 25 SMSAs for a 12 year period (1971-1982) will be used. Demographic, industrial, economic, health care market and legal factors serve as independent predictor variables for HMO entry, and as control variables for assessing HMO market share effects on hospital use and cost. These data are available in published sources. Other data relating to political, institutional, legal and community factors which may also be important in predicting HMO entry and its subsequent growth will be gathered by personal interviews with community key persons in a subset of 8 SMSAs. If these data do have predictive value, a search for their analogues in published sources will be conducted. State of the art econometric techniques applied with rigor to the nationally representative data set will yield scientifically valid and generalizable estimates of HMO effects on hospital costs, and thus on the viability of this cost containment strategy.